ICICI Prudential Life Insurance recently launched ICICI Pru SmartKid 360. Several other insurers also offer such plans, designed to help parents build a corpus for key milestones such as higher education and marriage.
How they work
Child insurance plans are structured for long-term, goal-based savings.
“The plan provides milestone-based payouts aligned to the child’s age, often around 18 or 21, when education expenses peak,” says Vikas Gupta, chief product officer, ICICI Prudential Life Insurance Company. These plans also offer a maturity benefit at the end of the policy term. Some plans allow partial withdrawals at key academic stages, such as college admission.
“The parent typically acts as the life insured, while the child is the beneficiary,” says Anup Seth, chief distribution officer, Edelweiss Life Insurance.
These plans come in two variants. “Parents can choose between guaranteed benefit options, which prioritise certainty, and market-linked variants aimed at long-term growth,” says Madhu Burugupalli, head – product management & strategy, Bajaj Life Insurance.
Premium waiver benefit (which could be in-built or may have to be purchased as a rider) is a defining feature of these plans. “In case of the unfortunate demise or permanent disability of the parent, all future premiums are paid by the life insurer,” says Gupta. The policy continues till maturity. The life cover amount is paid to the nominee in case of death, while milestone payouts and maturity benefits remain intact.
Disciplined savings, goal protection
Buyers of these plans must pay premiums at predefined intervals. “Regular savings over a long period allow compounding to grow the corpus,” says Burugupalli. These plans also protect child-specific goals. “Parents can ensure fruition of goals even in their absence,” says Gupta.
“These plans allow parents to lock in today’s high interest rate for the next 10–20 years, especially valuable in a declining rate environment,” says Seth.
Child insurance plans have a few notable limitations. Traditional variants deliver modest returns. “They typically offer returns in the range of 4–6 per cent annually, which would fall short of education inflation rates of 10–12 per cent,” says Abhishek Kumar, a Securities and Exchange Board of India (Sebi)-registered investment adviser and founder, SahajMoney.com.
These products also lock policyholders into long-term commitments and offer limited flexibility. Market-linked versions’ returns fluctuate in the short term.
An alternative approach</span>
For some investors, a combination of term life insurance and mutual fund investments may offer a more flexible solution. “Term insurance provides high life cover at low cost, while mutual funds invested through systematic investment plans (SIPs) offer better liquidity and possibly higher returns over the long term,” says Kumar.
In the event of the parent’s death, payout from the term plan can fund child-specific goals.
Who should consider them
Some people may go for child plans. “They suit risk-averse parents with limited discipline who prioritise guaranteed coverage and peace of mind over returns,” says Kumar.
Ranjit Jha (CEO), managing director and chief executive officer (CEO), Rurash Financials, says these plans work for parents with a steady income who are serious about planning for their child’s education.
Some parents can avoid them. “Financially savvy and disciplined investors who are comfortable maintaining systematic investments and seek higher returns and flexibility may find the term insurance plus mutual fund route more suitable,” says Kumar.
Choosing the right plan
Parents who decide to go for a child insurance plan should check a few parameters. “Evaluate the amount of life cover and the investment horizon,” says Aditya Mall, appointed actuary, Generali Central Life Insurance.
Jha suggests checking whether the waiver of premium benefit is available, and if the payout schedule is flexible and meets the child’s needs. Mall suggests buying these plans as early as the child’s birth or latest by the age of five.
The writer is a Mumbai-based independent journalist.